Tag Archives: Fracking

Appointments to Environment/Energy Commissions Violated N.C. Constitution

February 1, 2016. On January 29, 2016, the N.C. Supreme Court issued a decision in McCrory v. Berger — a lawsuit filed  by Governor Pat McCrory  to challenge the constitutionality of two recent state laws that created new executive branch commissions dominated by legislative appointees. The ruling in the Governor’s favor means the three commissions cannot act until the General Assembly changes the statutes governing commission appointments.

Background. The lawsuit concerned appointments to the Coal Ash Management Commission,  the Oil and Gas Commission,  and the Mining Commission. The Coal Ash Management Act of 2014  gave the Coal Ash Management Commission authority to (among other things) make final decisions on closure of coal ash impoundments.  The 2014 Energy Modernization Act eliminated the  Mining and Energy Commission (created in 2012) and divided its regulatory responsibilities  between a new Oil and Gas Commission and a reconstituted Mining Commission. In each case, the legislature gave itself the power to appoint a majority of the commission members.

The lawsuit filed by Gov. McCrory argued the legislative appointments violated the N.C. Constitution. In March of 2015, a special panel of three superior court judges ruled in the Governor’s favor, concluding that the N.C. Constitution bars legislative appointments to commissions that have executive authority. “Executive authority” generally means authority to implement existing laws as distinct from legislative authority to adopt new laws.   See an earlier post  on the superior court decision.

N.C. Supreme Court opinion. The N.C. Supreme Court opinion disagrees with the superior court decision on one key point — the Supreme Court ruled that the N.C. Constitution does not entirely bar the legislature from making appointments to executive branch commissions.  The court interpreted the Constitution’s “appointments clause” to allow the legislature to make appointments to statutorily-created offices including commission seats. The court ruled, however, that  legislative appointments to the Coal Ash Management Commission,  Oil and Gas Commission  and Mining Commission violated the separation of powers clause in Art. I, § 6 of the N.C. Constitution,  which requires that  “[t]he legislative, executive, and supreme judicial powers of the State government shall be forever separate and distinct from each other.”

The court concluded that the appointments scheme for the three executive branch  commissions interfered with the Governor’s constitutional duty to insure that state laws are faithfully executed:

In light of the final executive authority that these three commissions possess, the Governor must have enough control over them to perform his constitutional duty. The degree of control that the Governor has over the three commissions depends on his ability to appoint the commissioners, to supervise their day-to-day activities, and to remove them from office.

The court pointed to three factors that combined to create an unconstitutional legislative  interference with the Governor’s executive powers and responsibilities:

1. Each commission has authority to take final executive action  (i.e., the Coal Ash Management Commission has the final authority to prioritize coal ash ponds for closure and approve final closure plans);

2. The legislature appointed a majority of the members to each commission; and

3. The legislature limited the Governor’s ability to remove commission members by allowing removal only for cause (such as misconduct).

The implication of the decision is that a separation of powers violation has occurred when all three conditions exist.  The court included a footnote specifically suggesting that the outcome may be different with respect to a body like the Rules Review Commission that exercises a different kind of authority.

The court refused to address another separation of powers issue raised in the case. The Governor  argued that the legislature also violated separation of powers  by statutorily directing the Coal Ash Management Commission (CAMC)  to operate “independently” of the executive department where it is housed.  (Legislation creating the CAMC placed the commission under the Department of Public Safety.) The Supreme Court held the issue had been mooted by the portion of its decision ruling appointments to the CAMC unconstitutional.  The issue could come up again if the  legislature changes the appointments statute in response to the court’s decision,  but leaves the “independence” provision  in place.

Implications.  The three commissions directly named in the case cannot act until the legislature changes the unconstitutional appointment provisions and new appointments are made.  The Coal Ash Management Commission (CAMC) began meeting in 2014, but has not met since the March 2015 superior court decision that first ruled appointments to the CAMC unconstitutional. In the meantime, other pieces of the Coal Ash Management Act have moved  forward; a newly appointed CAMC will need to catch up.  The Oil and Gas Commission took over implementation of state laws on oil and gas development from the Mining and Energy Commission, so the court’s ruling could delay decisions related to hydraulic fracturing.

Two other pending lawsuits  raising similar separation of powers issues may be affected by the McCrory v. Berger decision. The N.C. State Board of Education sued to challenge Rules Review Commission authority over rules adopted by the Board.  The Board of Education raises several constitutional issues, including a separation of powers violation based on the fact that all Rules Review Commission members are legislative appointees.   The McCrory v. Berger footnote about the Rules Review Commission seems to caution against assuming the court would also find  RRC  appointments to violate separation of powers.   The footnote suggests that the Rules Review Commission’s specific function — to review and object to rules adopted by executive branch agencies — may put it in a different category than the commissions addressed in McCrory v. Berger.

Another pending separation of powers case  in Wake County Superior Court challenges the constitutionality of appointments to the Mining and Energy Commission (MEC). The MEC  seems to fit the McCrory v. Berger template: the commission had authority to take executive actions; the legislature made a majority of commission appointments; and the Governor only had the power to remove a commission member for cause. But the case also presents an additional question: Are actions taken by an unconstitutionally appointed commission void? Over a two-year period, the MEC developed and adopted state rules for hydraulic fracturing.  Plaintiffs in the MEC case (Haw River Assembly and a Lee County property owner) have asked the Wake County judge to rule appointments to the MEC unconstitutional and  void the rulemaking actions already taken by the commission.  The superior court judge had delayed hearing the MEC case until the N.C. Supreme Court issued a decision in McCrory v. Berger. While the Supreme Court decision now provides a roadmap for addressing the separation of powers issue, it doesn’t provide any guidance on how a separation of powers violation affects past commission actions.

2015 in Review — Legislation

January 12, 2016. Some trends in environmental legislation:

Limiting Local Government Authority. After several years of legislation limiting the regulatory authority of state environmental agencies, the General Assembly turned to local government.

  Senate Bill 119  (Session Law 2015-264)  may have the practical effect of  eliminating local government  authority to regulate shale gas operations under  zoning, land use, stormwater, health,  and sedimentation control ordinances.  In 2014,  Session Law 2014-4  preempted local ordinances that  “would prohibit or have the effect of prohibiting oil and gas exploration, development, and production activities, or use of horizontal drilling or hydraulic fracturing for that purpose”.   But the 2014 law created a presumption that local zoning and land use ordinances applicable to other types of development  (such as zoning, setbacks, buffers  and stormwater standards) could also apply to shale gas operations.

Senate Bill 119  rewrites  the 2014 provision to completely  preempt  local ordinances.  The new Oil and Gas Commission (replacing the Mining and Energy Commission) now has power to preempt the application of  local development ordinances even if  the ordinance would not preclude shale gas development or conflict with state standards.  Although the presumption  in favor of zoning and land use ordinances still appears in the law, the 2015 amendments direct the Commission to preempt a local ordinance at the request of the shale gas developer if the  drilling operation has received  state/federal permits and the Commission finds that exploration and development

…will not pose an unreasonable health or environmental risk to the surrounding locality and that the operator has taken or consented to take reasonable measures to avoid or manage foreseeable risks and to comply to the maximum feasible extent with applicable local ordinances.

In effect,  the Oil and Gas  Commission can set aside any  local ordinance and substitute its judgment about risk for that of local elected officials. Preemption of local ordinances could have several implications —

1. Complete preemption of local ordinances may  leave gaps in basic regulation of shale gas activities  since state standards do not address a number of   issues normally dealt with by local government such as noise,  traffic, solid waste disposal (trash — not drilling waste), and open burning.

2.  The law potentially allows preemption of local  stormwater ordinances needed to  meet state water supply watershed protection standards; comply with federal stormwater permits; or  minimize flooding.    The Environmental Management Commission has adopted stormwater rules  for shale gas operations, but those  rules expressly recognize that additional stormwater standards may apply to a particular operation and reserve the right to apply those standards — whether implemented by DEQ or by a local government.  The new preemption language in Senate Bill 119 does not recognize the possibility that local stormwater ordinances may be required under state or federal law.

3.  The provision  raises a question about implementation of  sedimentation control requirements through local sedimentation programs. The state’s Sedimentation Pollution Control Act allows cities and counties to take over implementation of the sedimentation program. In areas with local programs, sedimentation control requirements are set and enforced through local ordinances.  Nothing in Senate Bill 119 prevents the Oil and Gas Commission from preempting a local sedimentation ordinance.

♦  House Bill 44  included two provisions limiting local government authority to adopt or enforce other types of development ordinances —

Section 2 bars  local governments from enforcing a “voluntary” state environmental rule,  but defines “voluntary” rule in a creative way to include any state rule  that has  been repealed;  has been adopted, but is not yet in effect; or has been “temporarily or permanently held in abeyance”.  The last category would cover the  Jordan Lake water quality rules that have been delayed by legislative action.  Preventing  local enforcement  of existing Jordan Lake stormwater ordinances  may have been the main purpose of the provision, but it could also raise questions about the enforceability of other local ordinances. No one has  attempted to catalog all of the local ordinances that include requirements that once appeared in a now-repealed state rule or are proposed to be included in a new state rule that has not yet been adopted.   The House Bill 44 provision seems to assume that local environmental ordinances always follow  state regulatory action; it  ignores direct grants (by the General Assembly) of local government authority to  adopt ordinances to protect  public health and the environment.  For more on the implications of this provision,  see an earlier post.

Section 13  limits local government authority to adopt riparian buffer requirements.  The bill defines “riparian buffer”  to mean any setback from surface waters —  which could include a setback imposed for flood control.  (The definition seems broader than other  language in the provision  specifically referring  to  riparian buffers for water quality protection.) Under the bill, a local government cannot adopt and enforce a riparian buffer ordinance for water quality protection  that  goes beyond requirements of state or federal law or the conditions of a state or federal permit unless the EMC  approves the ordinance.

Shielding Evidence of Possible Environmental Violations

♦  House Bill 765  (the Regulatory Reform Act of 2015)  creates a new legal  privilege for information contained in an environmental audit report. (Companies use environmental audits  to identify  compliance problems;  opportunities for waste reduction;  and operational changes to reduce environmental impacts.)   Information covered by the privilege does not have to be shared with regulators and cannot be used by  regulatory agencies to document an environmental violation in  a civil enforcement case.   The privilege does not apply in a criminal  case, but the vast majority of environmental enforcement actions rely on civil rather than criminal penalties. See the section on environmental audit privilege/self-disclosure immunity in this earlier post for more on the scope of the privilege.

♦   House Bill 405    allows an employer to take legal action against an employee who 1. enters a “nonpublic” area of the workplace;  2.  takes photographs, makes recordings, or copies records without permission; and 3.  uses those documents “against the interest of the employer”.   The employer can sue the employee  for  monetary damages,  including legal fees and a $5,000 per day penalty.   Animal rights activists referred to House Bill 405  as the “Ag-Gag” bill — a term used for legislation targeting activists who go undercover on farms and in  processing facilities to document animal cruelty violations. But House Bill 405 is not limited to agricultural workers or documentation of animal cruelty. The bill could also be used to punish an employee who documents  illegal dumping of hazardous  waste and shares the evidence with regulators or the media.  See an earlier post for more on House Bill 405.

Lessening the Consequences for Some Environmental Violations.

♦  House Bill 765 grants immunity from civil penalties and fines for environmental violations that are voluntarily disclosed to state regulators.  The bill defines “voluntary” disclosure;  immunity would not apply to violations  documented  through information the company has a legal duty to report under state or federal law, for example. The bill limits how often a person (or company) can claim self-disclosure immunity — no more than once every two years; twice in a five-year period; and three times in a ten-year period.  The bill never defines “civil penalties and fines”, leaving a question about the breadth of the immunity.  For example, the bill is silent on whether “civil penalties and fines” includes natural resource damages such as  fish kill damages assessed for a wastewater spill. For a more detailed comparison to past state and present U.S. Environmental Protection Agency enforcement policies on self-disclosed violations, see an earlier post.

♦  A provision in the budget bill (S.L. 2015-241) limits the total civil penalty for ongoing  violations of the Sedimentation Pollution Control Act to $25,000 if: 1. the violator had not previously been assessed a penalty for a sedimentation violation (which does not necessarily mean the person has not previously violated the law); and 2. the violator addresses damage caused by the violations within 180 days.  Previously, the law allowed the Department of Environmental Quality to assess a maximum penalty of $5,000 per violation, per day for continuing sedimentation violations. The fact that the meter on civil penalties could run until the violator addressed the problem created a powerful incentive for quick response — even though DEQ rarely assesses the maximum penalty. Quick action to correct a violation  translates to  less stream damage from uncontrolled erosion and sedimentation.  The recent amendments have the somewhat perverse effect of assuring the violator that  sedimentation violations can go uncorrected for nearly six months without resulting in an increased penalty.  The provision also means that committing numerous sedimentation violations on the development site will result in the same penalty as a single violation.  The new cap on continuing violation penalties also applies to penalties assessed by local sedimentation programs.

♦ House Bill 765  amends existing state laws to allow broader use of “risk-based”  cleanup  of environmental contamination. In a risk-based cleanup, the person responsible for environmental  contamination is not required to fully restore contaminated soil and groundwater. A risk-based  cleanup plan relies on a combination of limited remediation and land-use controls (such as deed restrictions) that prevent exposure to contamination  remaining on the site after the partial cleanup.  Groundwater cleanup costs represent a significant consequence of violating environmental laws — often exceeding penalties assessed by regulators — so  allowing a  more limited cleanup reduces the cost of violating the law.  (It also means the groundwater may remain contaminated and unusable for a very long time.)

House Bill 765 extends the benefits of lower cost, risk-based cleanup to several categories of  contaminated sites that had been  excluded  under  the state’s  2011  law  allowing risk-based remediation of  industrial contamination. Two of those categories broaden the use of risk-based remediation in ways that may undermine incentives for present environmental compliance:

—  New contamination incidents.  House Bill 765 repeals statute language  limiting use of risk-based remediation to contamination  reported  before the 2011 risk-based remediation law went into effect.  In 2011, allowing risk-based cleanup of industrial sites was seen as an incentive for remediation of properties with longstanding contamination  —  often resulting from activities that had been lawful at the time. Remediation costs remained  a significant incentive for present-day compliance with environmental standards. Removing the date restriction means that a  risk-based cleanup will now be an option for new contamination incidents resulting from activities violating current environmental laws.

—  Sites contaminated by petroleum releases from above-ground  storage tanks (ASTs).  There has long been a risk-based cleanup program for petroleum underground storage tanks (USTs),  but UST operators also have to meet extensive regulatory standards to  prevent future pollution incidents.  House Bill 765 gives AST owners  the benefit of risk-based cleanup without regulatory standards to prevent future releases.

Eliminating or Streamlining State Permit Requirements for Environmental Infrastructure

♦ The state budget (S.L. 2015-241)  includes a provision that changes landfill permitting, allowing issuance of a single “life of site” permit to cover construction and operation of a landfill that  often has a 30-year lifespan.  State rules had previously  required review and approval of the entire landfill site before construction, but also required each 5 or 10-year phase of the landfill to have a construction and operation permit.   Landfill construction will continue to be done in phases for economic and practical reasons,  but the “life of site permit” eliminates state compliance review for each new  phase of the landfill.   The change also seems to close the door on  new permit conditions for construction or operation of later landfill phases in response to scientific or  technological developments. The budget provision does not set minimum landfill inspection requirements in place of the 5 and 10-year phased permit reviews.

♦ House Bill 765 creates a new private permitting option for septic systems and other small on-site wastewater systems now permitted by local health departments. The provision  allows  a property owner to hire an engineer and soil scientist to approve the location and design of the system. The local health department will receive information about the system, but the engineer’s approval substitutes for a permit. It isn’t clear that  the laws allows the health department to prevent construction of an engineer-certified system based on inconsistency with state siting and design standards.

Skepticism about State Water Quality Rules. The 2015 General Assembly continued to focus on water quality rules and particularly those affecting real estate development activities — such as stormwater standards, wetland and stream mitigation requirements, and riparian buffer protection rules.

The state budget includes a special provision further delaying implementation of the Jordan Lake water quality rules for  another 3 years or one year beyond completion of the Solar Bee pilot project (whichever is later). See an earlier post  here on the  2013 legislation creating the pilot project. The rules had been developed by the state’s Environmental Management Commission to address poor water quality  caused by  excess nutrients reaching the lake in wastewater discharges and  runoff from agricultural lands and developed areas.  Since adoption of the rules, the legislature has taken repeated steps over several legislative sessions to delay compliance deadlines in the rules. This session,  the  legislature also barred local government enforcement of stormwater ordinances adopted to comply with the Jordan Lake rules.

♦ House Bill 765  limits  regulatory authority and mitigation requirements for isolated wetlands and intermittent streams. (Isolated wetlands are wetlands that fall outside federal permitting jurisdiction under the Clean Water Act because the wetlands lack a connection to “navigable waters”.)  These provisions continue a several-year legislative trend toward limiting  protections for wetlands and waters to the minimum required under federal law.

♦ Some proposals to significantly roll back other water quality rules (particularly stormwater and  riparian buffer rules) failed this session, but became the subject of legislatively mandated studies. Among the studies required before the April 2016 legislative session: a study of coastal stormwater rules; a study on the feasibility of entirely exempting linear utility projects (such as pipelines) from  environmental standards;  and an Environmental Review Commission study of the  state stormwater program.

Expanding Use of Erosion Control Structures on Ocean and Inlet Shorelines

♦ A   provision in the budget bill  (S.L. 2015-241)  changes state rules on use of sandbag  structures on the oceanfront.  Rules adopted by the N.C. Coastal Resources Commission have limited use of protective sandbag structures to situations where a building faces an imminent erosion threat. (These sandbag  structures are substantial in size and can have many of the same long-term impacts as permanent seawalls; the rules do not apply to sandbags used to prevent water from entering a building during a flood event.)   The budget bill changes the standards to allow an oceanfront property owner to install a sandbag  structure to align with an existing sandbag structure on adjacent property without showing an imminent erosion threat to a building on their own property.

♦ The budget bill also increases the number of terminal groin structures that can be permitted at the state’s ocean inlets from four to six and identifies New River Inlet for location of two of the additional structures. See an earlier post  for more on earlier legislation allowing construction of terminal groins as a  pilot project. The latest provision continues a several-year trend of reducing regulatory requirements for approval of terminal groin projects and increasing the number of projects that can be permitted.

N.C. Environmental Legislation 2015: The Bills

October 12, 2015.   The legislative session finally ended  in the wee hours of September 30 and changes to state  environmental laws continued to be in play until the very end.   Several of the provisions discussed below were enacted as part of  House Bill 765 (the Regulatory Reform Act of 2015) which has not yet been signed by the Governor. H 765 contains too many pieces to completely catalog here; some have been  very controversial.  The other bills referenced in the post have already become law.

Not a complete list, but some of the most significant changes affecting the environment:

“AG-GAG” LEGISLATION.   House Bill 405  allows an employer to take legal action against an employee who:  a.  takes photographs, makes recordings, or copies records; b. in a nonpublic area of the workplace; c.  without permission;  and d. uses those documents “against the interest of the employer”.   H 405 allows  the employer to sue the employee for monetary damages,  including legal fees and a $5,000 per day penalty. Animal welfare activists have characterized these kinds of  bills  as “ag-gag” legislation intended to prevent documentation of animal cruelty at agricultural operations.  House Bill 405,  however,  does not just affect agricultural workers or documentation of animal cruelty. The restrictions could also affect employee efforts to document ongoing environmental violations such as improper disposal of hazardous substances. See an earlier post for more on the implications of H 405. Note: Governor Pat McCrory vetoed H 405, but the General Assembly overrode the veto to allow the bill to become law.

FRACKING.  One of the final bills of the session, Senate Bill 119,  severely limits local regulation of  hydraulic fracturing (“fracking”) operations.  First, a little background. 2014 legislation prevented local governments from banning fracking altogether, but G.S. 113-415.1 allowed  cities and counties to continue to apply ordinances applicable  to all development in the jurisdiction — such as zoning and stormwater ordinances —  to fracking operations.  The state’s Mining and Energy Commission had authority to override a  local ordinance that had the effect of precluding natural gas exploration and development.

Senate Bill 119 rewrites the  2014 law to invalidate all local ordinances that directly regulate fracking, preempting ordinances that go beyond or conflict with state standards for hydraulic fracturing operations.  The bill also allows the oil and gas operator to challenge the application of  more general local ordinances (such as zoning and stormwater ordinances) to fracking operations.  These challenges go to the state  Oil and Gas Commission (which has replaced the Mining and Energy Commission in regulating oil and gas operations). The Commission will  decide “whether or to what extent to preempt the local ordinance to allow for the regulation of oil and gas exploration, development, and production activities”.  The  2015 amendments clearly  give the Oil and Gas Commission very broad power to preempt even general development ordinances. Preemption does not require a finding that the ordinance precludes natural gas exploration and development or conflicts with state standards.  As long as the natural gas operator has received  state/federal permits, the bill seems to direct the Commission to preempt application of general development ordinances to fracking operations if the Commission finds that fracking

…will not pose an unreasonable health or environmental risk to the surrounding locality and that the operator has taken or consented to take reasonable measures to avoid or manage foreseeable risks and to comply to the maximum feasible extent with applicable local ordinances.

STATE ENVIRONMENTAL POLICY ACT. For over 40 years, the State Environmental Policy Act  (SEPA) has required environmental review of  projects involving expenditure of public funds or use of public lands.   An earlier post provides some background on SEPA.   House Bill 795  limits  environmental  review under SEPA to projects that:  1.  involve expenditures of $10 million or more in public funds;  or 2. affect 10 acres or more of public lands and result in permanent changes to the landscape.  The  new thresholds mean many public projects with potentially significant impacts will be exempt from SEPA review. For projects that still require SEPA review,  House Bill 795 narrows  the scope of review to  direct project impacts — excluding indirect impacts  and the combined effects of  similar projects. The final version of the bill made some exceptions to these changes as applied to interbasin transfers (the movement of water from one river basin to another for water supply).   All interbasin transfer  proposals will continue to require SEPA review without regard to the amount of public money or public land  involved and the scope of review will include direct, indirect and cumulative impacts.

In an ironic twist, H 795  requires the Department of Environmental Quality (DEQ)  to create a  new environmental review process for water/wastewater infrastructure projects that receive loans from the Drinking Water Revolving Loan Fund or the Clean Water Revolving Loan Fund.  Federal rules  require  those projects to go through an environmental review equivalent to review under the National Environmental Policy Act.  Eliminating SEPA review  for smaller revolving loan projects had the  unintended  effect  of shifting the projects back into a lengthier federal environmental review process. In short, legislators liberated the projects from SEPA  only to create a SEPA-like environmental review process to avoid the still worse fate of federal review. The entire debate over H 795 indicated a  lot of  confusion about how SEPA works and the likely impact of the bill.  See another post for more on the misconceptions about SEPA that seemed to shape H 795.

LOCAL ENVIRONMENTAL ORDINANCES.   The legislature also  took aim at local environmental ordinances. Section 2 of  House Bill 44 includes a somewhat opaque provision barring local governments from enforcing “voluntary” state environmental rules. The words “voluntary” and “rule”  do not generally exist in the same space;  a rule, by definition is not voluntary.  The provision  may really be intended to stop local implementation of stormwater ordinances adopted to comply with the  Jordan Lake water quality rules.  Section 2  applies not just to local implementation of  the elusive  “voluntary” state rule, but also to implementation of state rules that have been repealed; rules that have been adopted, but are not yet in effect; or rules that are “temporarily or permanently held in abeyance”. The Jordan Lake rules fall into the last category as a result of earlier legislation delaying state implementation of the rules.

The new provision affects both issuance of new development permits and enforcement of conditions on permits that have already been issued. Barring enforcement of conditions on  previously issued permits  has implications for both developers and local governments.  The questions that immediately come to mind (using the Jordan Lake stormwater requirements as an example): Can development already permitted under the Jordan Lake stormwater standards  move ahead without meeting any stormwater requirements?  or Will the development require a modified permit to reflect  stormwater standards that might have applied prior to local adoption of the Jordan Lake stormwater ordinances?

Section 13 of House Bill 44 limits local government authority to adopt riparian buffer requirements.  The bill defines “riparian buffer”  to mean any setback from surface waters —  which could include a setback imposed for flood control.  But much of the provision has been written to refer specifically to  riparian buffers for the protection of water quality.   Under the bill, a local government cannot adopt and enforce a riparian buffer ordinance for water quality protection  that  goes beyond requirements of state or federal law (or the conditions of a state or federal permit) unless the Environmental Management Commission approves the ordinance.

The bill also requires riparian buffers affecting  residential lots  to be shown on the subdivision plat. And an unusual provision addresses development projects that meet riparian buffer requirements by designating buffers as common area or open space:

When riparian  buffers are placed outside of lots in portions of a subdivision that are designated as common areas or open space and neither the State nor its subdivisions holds any property interest in that riparian buffer area, the local government shall attribute to each lot abutting the riparian buffer area a proportionate share [of the buffer area] ….for purposes of development-related regulatory requirements based on property size, including, but not limited to, residential density and nonresidential intensity calculations and yields, tree conservation purposes, open space or conservation area requirements, setbacks, perimeter buffers, and lot area requirements.

Allocating buffers designated as common area to adjacent property owners for purposes of meeting development standards may create some complications for developers.  Instead of allowing common area buffers to be used to offset density limits (or other requirements) for the development as a whole, the bill requires the benefits to go to  individual  lot owners. For example,  a lot owner may be able to build on a greater percentage of the platted lot because a proportional share of the adjacent buffer would be counted toward the lot area. But whatever flexibility the lot owner gains will be lost to the developer who  can no longer use the riparian buffer common areas to offset  built-on area (for example)  throughout the development as a whole.

ENVIRONMENTAL AUDIT PRIVILEGE/SELF-DISCLOSURE IMMUNITY.  Two of the most important changes to state environmental law can be found in House Bill 765  (the Regulatory Reform Act of 2015). The bill creates a new privilege for information a company gathers on its own environmental violations, preventing use of the information in a civil case. (The privilege does not apply in a criminal prosecution.)   The bill also grants immunity from civil penalties and fines for environmental violations voluntarily disclosed to state regulators.  Supporters of the bill believe these protections will encourage companies to conduct environmental audits to identify and correct environmental violations more quickly.

The bill excludes certain types of information from the audit privilege (such as data required to be reported under state and federal law). Although the  bill  creates some exceptions to the audit privilege, most of the exceptions require state regulators to show the violator deceptively withheld information or failed to correct violations in a timely way — which may be difficult without access to the audit information itself. H 765 protects environmental audit information from use  in both civil penalty cases and in actions to compel cleanup of environmental contamination.

Although less clear, the  bill may also shield environmental audit information from a private plaintiff seeking compensation for personal injury or property damage caused by an environmental violation.   The section of the bill creating the audit privilege says flatly that the audit information “is privileged and, therefore, immune from discovery and is not admissible as evidence in civil or administrative proceedings”. That section of the bill does not limit the privilege to  environmental enforcement cases brought by the state.  On the other hand, the section of the bill  on  revocation of the audit privilege has been written only to allow the “enforcement agency” to ask a court to revoke the audit privilege.  The bill needs to be clarified in one direction or the other — either the privilege applies only to state enforcement actions or it applies to other civil actions and the opportunity to ask for revocation of the privilege  should  be broader.

The self-disclosure immunity provisions in H 765  grant immunity from civil penalties and fines based on voluntary disclosure of the violation.  The bill sets conditions that must be met to make a self-disclosure “voluntary”.  The final version of the bill also put limits on  how often a person (or company) can claim self-disclosure  immunity — no more than once every two years; twice in a five-year period; and three times in a ten-year period.  The bill never defines “civil penalties and fines”, leaving some questions about the breadth of the immunity being granted.  For example, the bill is silent on whether “civil penalties and fines” includes natural resource damages. (An example would be  fish kill damages assessed as a result of a wastewater spill.)

For a more detailed comparison to past DENR and present U.S. Environmental Protection Agency enforcement policies on self-disclosed violations, see an earlier post.  Note: EPA has long opposed statutory audit privilege out of concern that  withholding information from regulators will  hamper effective environmental enforcement.

RISK-BASED REMEDIATION. House Bill 765 also makes changes to state laws allowing the person responsible for environmental  contamination (the “responsible party”) to do a partial cleanup of  groundwater and soil contamination by relying on land-use controls to limit future exposure to contamination that remains on the site.  The biggest changes:

♦  Sites where contamination has migrated onto adjacent properties would become eligible for risk-based cleanup.  Existing law requires  contamination that has migrated off the property where it originated to be remediated to “unrestricted use standards”  — meaning  levels safe for any possible land use without reliance on land use controls to prevent exposure to contamination.  That effectively means remediation of contaminated groundwater to meet  state groundwater standards. Risk-based cleanup of contamination on adjacent properties had not been allowed because of the additional complications of managing exposure to those contaminants on property the responsible party does not control. H 765  makes  a risk-based cleanup on adjacent property possible with the property owner’s permission. The cleanup would have to meet the same remediation standards applied to the  source site  with an additional stipulation that the remediation plan cannot cause contaminant levels on the adjacent property to actually increase.

♦ The bill removes statute language that had limited risk-based remediation to contaminated sites reported to DENR  before the risk-based remediation law went into effect in 2011, allowing   lower-cost, risk-based remediation as an option for future pollution events.

♦ H 765 adds new categories to an existing statutory list of sites excluded from these particular  risk-based remediation provisions.  The new exclusions cover coal ash disposal sites and animal waste management systems.

♦ The bill creates a separate risk-based remediation program for above-ground petroleum storage tanks (ASTs). The AST program closely follows  the model of the basic risk-based remediation statute, but imposes lower fees on the person responsible for cleanup.

WHAT DIDN’T HAPPEN AFTER ALL.  Other high profile (and controversial) changes came and went as the legislation session wound down. Among the proposals discarded for now:

Broad changes to riparian buffer rules.  Proposals to significantly roll back riparian buffer requirements for nutrient sensitive waters fell away in negotiations between the House and Senate.  Instead, House Bill 44 requires a study of the buffer rules, including ways to reduce regulatory burden on owners of property platted before their adoption.  The legislature did enact a few limited changes to buffer requirements.  House Bill  44 directs the Environmental Management Commission  to allow case-by-case modification of the requirement to maintain woody vegetation in riparian buffers  if the landowner shows that  alternative measures will provide equal or greater water quality protection. House Bill 765  alters  state stormwater rules to  (among other things)  allow more intensive development in riparian buffers along shellfish waters, outstanding resource waters and high quality waters if stormwater  from the development is collected, treated and discharged through the vegetated buffer. The provision doesn’t put any upper limit on the amount of impervious surface allowed in the area previously known as a buffer, so it isn’t clear how much vegetated buffer will remain to discharge the stormwater through.

Repeal of state fees supporting electronics recycling programs. The repeal proposed by the Senate turned into a legislative study of electronics recycling.

♦  Repeal or significant  rollback  of the state’s Renewable Energy Portfolio standard.  Efforts to freeze the REPS standard at 6% of retail sales failed. (Although not before popping up in multiple bills.)

♦  LImits on the state Environmental Management Commission’s authority to adopt federal air quality standards. The proposal could have put North Carolina’s delegated Clean Air Act program at risk. In the end, the General Assembly settled for a provision prohibiting the state air quality program from enforcing federal standards for wood heaters. The provision doesn’t have any real effect since  EPA has never delegated enforcement of the  standard for wood heaters to the states.

The  next session of the N.C. General Assembly convenes on April 25, 2016.

2015 Environmental Bills — Part II

April 17, 2015. A continuation of the previous post. Not a complete list, but hopefully  most of the significant bills.

Amend Environmental Laws.  In the category of you just can’t have too many — there are actually three “Amend Environmental Laws” bills this session (so far).  As noted in the previous post, House Bill 157 (Amend Environmental Laws) has already been enacted into law and House Bill 593 (Amend Environmental Laws-2)  amends  laws allowing reimbursement for third-party damage claims as a result of leaking petroleum storage tanks. I missed House Bill 576 (Amend Environmental Laws-1); at the moment, the bill  amends  solid waste laws to allow  the white goods tax (currently used by local governments to manage discarded refrigerators and other large appliances) to also be used for programs to manage discarded electronic devices.    Amend Environmental Laws-1 may also pick up additional provisions as it moves through committee.

Contaminated Sites. House Bill 748 (Establish Contamination Source Removal/Disposal Bd) creates a new full-time  (salaried) board to take over DENR’s responsibility for cleanup of contamination at pre-1983 landfills and other contaminated sites. The “pre-1983 landfills” are unlined waste disposal  sites — in some cases,   simply  dumps –that stopped operating before 1983 to avoid having to comply with federal standards for waste disposal facilities.  Many have groundwater contamination.  A 2007  state law  gave DENR responsibility for assessing and remediating the sites. Many of the landfills had been operated by local governments, so the 2007 legislation freed local governments of the potential environmental liability in return for a state solid waste disposal tax to fund cleanup.  House Bill 748  expresses concern about the slow pace of remediation.  It will be interesting to get more of the back story on the bill.  The concern may be as much about unspent funds earmarked for the cleanup as it is about unremediated contamination;  a  pot of money always attracts attention.  Reality is that contaminated sites require a  lot of assessment work before actual cleanup can begin.  Most  state-funded remediation programs have had a slow start up before making significant outlays for remediation.

Also,  a note that  House Bill 639 (Risk-based Remediation Amends) proposes the same amendments to remediation laws that appear in the Senate regulatory reform bill. You can find a description of those provisions in an earlier post.

Fracking. House Bill 773 would strengthen  requirements for public disclosure of chemicals used in hydraulic fracturing fluid.

Riparian Buffers. House Bill 760 is the  House regulatory reform bill.  The environmental provisions include significant changes to state laws allowing use of riparian buffers to protect water quality. It isn’t clear exactly how broad the bill’s restrictions on local government buffer ordinances are intended to be.  The bill amends a law written to allow  state delegation of riparian buffer programs under the nutrient sensitive waters (NSW) rules to local government, but  some of the bill language could be interpreted to prohibit local adoption of riparian buffer ordinances for any other purpose:

Units of local government may impose restrictions upon the use of riparian areas as defined in 15A NCAC 02B.0202 only within river basins where riparian buffers are required by the State.

Local riparian buffer ordinances  are sometimes adopted in response to other  state/federal water quality mandates  — such as Phase II stormwater permit conditions, water supply watershed regulations and endangered species management plans. So a local buffer ordinance may be needed to meet a water quality standard or  permit condition, but  not specifically required under state rules applicable to the entire river basin.  Assuming  the bill did not intend to prohibit use of riparian buffer ordinances to meet  other state and federal water quality mandates, it would be helpful to make that clear.

In  areas covered by the NSW buffer rules, the bill exempts residential lots platted before the buffer rules went into effect — even if the property could be developed for its intended purpose in compliance with the buffer requirement. (There are already exemptions and variances that cover previously platted lots that cannot be developed in full compliance with the buffer requirement.)  The buffer  rules are  part of  broader  water quality strategies designed to meet  federal Clean Water Act requirements. The Clean Water Act requires the state  to adopt a Total Maximum Daily Load (TMDL) –in effect, a cap —  for any pollutant causing impaired water quality. A number of state  water bodies, including the Neuse River and Falls Lake,  have impaired water quality due to excess nutrients  — particularly nitrogen and phosphorus.   The nutrient management rules provide the regulatory  underpinning  for  TMDLs that set nitrogen and phosphorus reduction targets for  those  rivers and lakes.    The rules include  riparian buffer requirements as a critical  tool in reducing the amount of nitrogen and phosphorus that runs off the land into surface waters. One question may be whether such a broad exemption from the buffer rules will allow the state to meet the federally-approved TMDLs.

The bill would also require that riparian buffers on shorelines bordered by coastal wetlands or marshland be measured from the waterward edge of the wetland. The term “coastal wetland” includes both wetlands that regularly flood on the tides and wetlands that flood on wind tides and seasonal high tides.  Under the provision, the “buffer” would often consist of wetlands with a frequent, direct  connection to coastal waters;  in some cases,  the buffer would effectively be in the water. The change would seem to defeat the purpose of having a buffer to allow polluted runoff to infiltrate through the soil rather than go directly into the water.

Stormwater. On the face of it,  House Bill 141 (Stormwater/Flood control) authorizes cities to use existing stormwater management programs to address flood risk by purchasing properties at high risk of flooding, elevating existing structures, and retrofitting  structures to reduce flood risk. The bill seems  intended to allow  cities in more populated counties to expand the purpose of existing stormwater programs to include flood management as well as water quality protection.  (The bill would limit the new authority to cities in a county with a population of 910,000 or greater and at least one city with a population of 500,000 or greater.)  One possible pitfall  — the bill could be interpreted as limiting the authority of other North Carolina towns and cities  to take similar actions through flood hazard mitigation projects.  For example, the small coastal town of Belhaven  has done a major flood hazard mitigation project  to elevate structures in areas repeatedly flooded due to hurricanes.   House Bill 141 may need to be clarified to avoid undermining cities and towns’  existing authority  to reduce flood hazards.

Fighting for Control of Environmental Policy

April 8, 2015.   In  North Carolina, most  environmental regulations  are adopted by commissions; the  members serve on a voluntary basis and receive only travel expenses and a minimal  per diem. Serving on a commission is like jury duty — for four years and with homework.   Of the major environmental commissions, the  Environmental Management Commission (EMC) adopts air quality, water quality, solid waste and hazardous waste regulations;  the  Coastal Resources Commission regulates coastal development;  and the Mining and Energy Commission regulates mining and onshore energy exploration and development.  The Department of Environment and Natural Resources (DENR)  provides staff support to the commissions,  but the commissions act independently  in adopting environmental rules.  DENR itself has very limited rulemaking authority.

The Governor and  legislative leaders  are currently battling for control of the commissions.  For  decades,  laws creating boards and commissions either gave the Governor exclusive  power to appoint the members  or gave  the Governor a majority of appointments and divided remaining appointments between the state House and Senate.  Since  2010,  the General Assembly has moved to increase legislative influence over the  commissions.  In the last three years, several laws creating new commissions have given the legislature a majority of the appointments.    Reflecting both legislative interest and emerging issues,  the new environment commissions have responsibilities at the crossroads of environmental regulation and energy development.

In 2012, the General Assembly created the Mining and Energy Commission to develop hydraulic fracturing rules. The commission  has eight legislative appointees, three ex officio members (who serve by virtue of holding a specific position — such as the chair of  N.C. State University’s Minerals Research Laboratory Advisory Committee) and only four  Governor’s appointees.  In 2014, the General Assembly continued the practice in creating  the Coal Ash Management Commission to address coal ash contamination;  an Oil and Gas Commission to regulate onshore and offshore energy production;  and a newly constituted Mining Commission.    All three of the new commissions are dominated by legislative appointees.

Late last year, Republican Governor Pat McCrory  filed suit to challenge the constitutionality of provisions in the Coal Ash Management Act of 2014  (creating the Coal Ash Management Commission) and the Energy Modernization Act of 2014  (creating  the  Oil and Gas Commission and Mining Commission). Two former governors, Republican Jim Martin and Democrat Jim Hunt, joined as plaintiffs. In part, the case challenged the  legislature’s authority to appoint a majority of the members serving on executive branch commissions as an unconstitutional  violation of separation of powers. The  lawsuit also raised some lesser separation of powers issues that I won’t go into here.

On March 16, 2015,  a special three-judge panel of Superior Court judges ruled in the governors’ favor in a far-reaching decision that has implications for all of the  commissions involved in environmental policy.   A copy of the court’s order in McCrory v. Berger can be found  here.  Several things to note about the decision:

1. Although the  lawsuit challenged the constitutionality of legislators appointing a majority of the members of a commission with administrative responsibilities, the decision goes further and concludes that it is unconstitutional for the General Assembly to appoint any members of a  commission that exercises “executive” authority.

2. The decision has broader implications than even the judges recognized.   First,  the judges assumed that the Governor appointed all  EMC  members until 2013;  in reality,   the legislature had  appointed at least one-third of the EMC members for decades.  The judges also mistakenly concluded that authority to regulate energy development and mining had rested entirely in the Governor’s appointees to the old Mining Commission and DENR officials  until 2014.   In fact, a 2012 law gave most regulatory authority over onshore energy development and mining to a Mining and Energy Commission also composed largely of legislative appointees.  Those errors caused the judges to mistakenly conclude  that appointees of the Governor  controlled implementation of laws  governing coal ash disposal, energy exploration and development,  and mining until very recently.

The judges’ misunderstanding of the  reality  before  2013-2014 suggests  they may not have fully appreciated the impact of their decision. The practice of making legislative  appointments to the environment commissions has been  longstanding and well-entrenched. Calling into question the constitutionality of commissions with legislative appointees has implications far beyond three commissions too recently created to have taken any significant action.  Which leads to the next problem–

3. The judges did not discuss how the ruling might affect the validity of actions taken by an unconstitutionally appointed commission.  Of the three commissions directly at issue in  the case, two (the Oil and Gas Commission and the new Mining Commission)  do not officially come into being until July 1 2015.  The Coal Ash Management Commission began meeting in  2014, but has not taken any action beyond submitting preliminary reports to the General Assembly.  But a number of other commissions with legislative appointees have made significant regulatory decisions for years.

In January,  Southern Environmental Law Center filed a  lawsuit on behalf of the Haw River Assembly and an individual Lee County property owner separately  challenging  the constitutionality of the Mining and Energy Commission on separation of powers grounds. The lawsuit  explicitly asked  the court to void hydraulic fracturing rules adopted by the MEC based on the constitutional violation. That case is still pending. The EMC, which has had legislatively appointed members for decades,  has been responsible for the entire body of state air quality and water quality rules.

One note– When the N.C. Supreme Court decided in Wallace v. Bone (1982) that the N.C. Constitution did not allow sitting legislators to also  serve  on the Environmental Management Commission, the court did not void EMC actions in which legislative members had participated.  There is probably an inverse relationship between the number of past actions potentially affected and the likelihood that a court will void past actions based on a separation of powers violation.

4. The most immediate impact of the ruling may be on implementation of the Coal Ash Management Act. The General Assembly gave the Coal Ash Management Commission the power to make critical decisions about closure of coal ash impoundments. Under the law, the commission –rather than DENR — will make final decisions prioritizing  coal ash impoundments for closure and approving closure plans. Those decisions will affect both the pace of closure and the environmental impacts. Because of the  ruling in McCrory v. Berger, the Coal Ash Management Commission canceled a planned meeting for March and finds itself in  limbo.

The next critical point in implementation of the Coal Ash Management Act  will come in early 2016 when the Coal Ash Management Commission should  receive DENR’s recommendations on prioritizing coal ash impoundments for closure.   Timelines in the law anticipate a final decision by the commission within 60 days after receiving the DENR recommendations. It isn’t clear that the legal issues  surrounding the commission will be resolved by then. One immediate question  will be  how to keep moving forward on implementation of the Coal Ash Management Act  until those issues have been settled.

Next steps — Legislative leaders have appealed the decision in McCrory v. Berger to  the N.C. Court of Appeals.

2014 Shale Gas Legislation

Note: The original  post has been updated to reflect the fact that a new bill draft presented in committee today added a section authorizing the issuance of permits for hydraulic fracturing effective July 1, 2015. 

May 20, 2014: In what has become an annual rite of spring, the N.C. Senate has introduced another bill on oil and gas exploration and development. Some highlights of Senate Bill 786 (Energy Modernization Act):

Fracking Rules. The bill extends the deadline for  adopting rules on hydraulic fracturing from October 1, 2014 to January 1, 2015. The extension gives the Mining and Energy Commission   (MEC) more  time to  consider public comment on draft rules and finalize the standards.  The bill  also  exempts the fracking rules from Administrative Procedure Act provisions that would otherwise prevent the rules from going into effect until mid-June 2016. The changes would allow  the rules to become effective in 2015 (assuming the legislature approves the rules) .

Allow Issuance of Permits for Hydraulic Fracturing Beginning July 1, 2015. A new version of the bill presented in committee today added a section authorizing the Dept. of Environment and Natural Resources to begin issuing permits for natural gas production using horizontal drilling and hydraulic fracturing on July 1, 2015.  Shale gas legislation enacted in previous legislative sessions had prohibited issuance of permits until the state had rules in place to regulate hydraulic fracturing. This provision authorizes DENR to begin issuing permits on a date certain without regard to the status of the proposed rules.

Trade Secrets. The Senate wades back into the controversial issue of  “trade secrets”.  In 2013, oil and gas industry giant Halliburton lobbied both the Mining and Energy Commission (MEC) and the legislature to allow the industry to withhold  “trade secret” information about chemicals used in hydraulic fracturing  from state regulators unless needed to respond to an emergency.  Earlier posts describe the previous (failed) attempts to legislatively resolve the tension between protecting trade secrets and making timely information available to doctors and first responders in an emergency.

Senate Bill 786  would require oil and gas companies to disclose  all of the chemicals used in hydraulic fracturing fluid to DENR, but protect  trade secret information from public disclosure.  The trade secret information would be maintained  by the State Geologist (a position in DENR) and protected from public disclosure under confidentiality provisions in the N.C. Public Records Act.  The bill would allow the State Geologist to provide the information to emergency  or medical personnel  if  needed to respond to an emergency. Up to this point, the bill follows a  common approach to balancing protection of trade secret information  with  emergency response needs.

The new controversy concerns penalties in the bill for unauthorized disclosure of  oil and gas industry trade secrets. First, the bill allows the owner of  the trade secret to require a doctor or fire chief receiving the information for emergency response purposes  to enter into a confidentiality agreement that may set out remedies  for breach of the agreement including “stipulation of a reasonable pre-estimate of likely damages”.  Without any further explanation of how the stipulation would be used, it  sounds  like a stipulated penalty that could make it unnecessary for the company  to establish  actual economic damages in court.

The bill also makes unauthorized disclosure of an oil and gas industry trade secret  by any person  a Class I felony if the person knew  the information was a trade secret. (Class I felonies carry a presumptive sentence of 4-6 months — but you may be eligible for community service or supervised probation.)  By contrast,  current state law protecting trade secrets does not impose a  criminal penalty for  unauthorized disclosure, unauthorized acquisition or even unauthorized use of trade secret information.  G.S. 66-154  provides civil remedies and allows recovery only of “actual damages…measured by the economic loss or the  unjust enrichment caused by misappropriation of a trade secret”.  Aside from  questions about the  reasonableness of the penalties proposed in Senate Bill 786,  it is clear that the bill creates  much more severe penalties for disclosure of  oil and gas industry trade secrets  than state law imposes for  unauthorized disclosure or use of  other types of trade secrets.

Well Drilling Fees.  The bill reduces the well drilling fee from $3,000 per well to $3,000 for the first well and $1500 for additional wells on the same well pad.

Notice of Oil and Gas Activity. Section 11  of Senate Bill 786 adds a new requirement that the company holding lease rights for oil and gas must provide 30 days notice to the owner of the surface property  before starting exploration, development and production activity.

Pre-Drill Water Testing/Presumption of Liability for Contamination. Section 12  of the bill would  amend the law requiring pre-drilling tests of water supply sources located within  5,000 feet of the  proposed wellhead by limiting the testing to water supplies within a  one-half mile (2,640-foot) radius  around the proposed wellhead.  A corresponding change to G.S. 113-421 would reduce  the area  where  a presumption of oil/gas operator liability for water supply contamination would apply — from  the current 5,000 feet to the same 1/2 mile radius around the wellhead. 

Restrictions on Local Ordinances Prohibiting Oil and Gas Activity.  Section 13  of the bill repeals any past local acts  or resolutions of the General Assembly prohibiting well siting, horizontal drilling or hydraulic fracturing  in specific localities. The bill then preempts local ordinances that have the effect of prohibiting oil and gas exploration and production,  horizontal drilling and hydraulic fracturing. An  oil/gas operator  could challenge a local ordinance as preempted under the law by filing a petition with the Mining and Energy Commission.   The bill creates a presumption that general  development  conditions in local zoning and land use ordinances   (such as buffers, setbacks and stormwater requirements) will continue to be valid unless the MEC  finds otherwise. To preempt a local ordinance, the MEC  would have to find that: 1. The ordinance would prohibit oil and gas activities; 2. The oil/gas operator has received all  necessary state and federal approvals (unless the only reason for denial was inconsistency with the local ordinance); 3. Local residents and elected officials had an adequate opportunity to participate in the permitting process; and 4. The oil and gas activities will not pose  “an unreasonable health or environmental risk” to the surrounding locality,  the operator will take reasonable measures to reduce foreseeable risks, and the operator will comply with local ordinances to the maximum extent feasible. This section of the bill seems to be modeled on a similar preemption  law concerning  the  siting of hazardous waste facilities.

Ban on subsurface Injection of drilling wastes.   The N.C. Senate has previously proposed to amend an existing state law prohibiting underground injection of waste to allow subsurface disposal of oil and gas drilling waste.  The earlier proposals ran into strong opposition from members of the Mining and Energy Commission as well as the public. In Section 14, Senate Bill 786 abandons the effort to authorize subsurface disposal of drilling waste and instead reinforces the existing prohibition on underground injection of waste found in G.S. 143-214.2.

Compliance review for oil and gas permit applicants. Section 14 also creates an environmental compliance review  for oil and gas permit applicants. The compliance review will cover at least the previous five years.  For business entities, the compliance review  will extend to any parent company, subsidiary, or other affiliated entity; a partner, officer, director, member or managing director; and any other person with a direct or indirect interest in the company (other than a minority shareholder in a publicly traded corporation).  The bill allows DENR to deny an oil and gas  permit based on a past history of significant or repeated violation of statutes, rules, orders or permit conditions.

Trespass.  The bill protects workers collecting seismic or other geophysical data from trespass claims as long as they do not physically enter private land without consent. Seismic surveys  use  sound waves to  characterize subsurface geology and identify potential oil and gas reserves. The survey team generates  sound waves  on one side of the  target area  (by setting off small explosive charges or using trucks specially outfitted to create vibrations); geophones record the waves on the other side of the target. The intent of the bill is to prevent trespass claims based on movement of  the seismic waves under surface properties  the workers do not physically enter. The  company conducting the  seismic testing  would still be liable for any physical or property damage caused  to the surface property.

Severance Tax. Section 16 of the bill creates a new severance tax for oil and gas.  Others with expertise in severance  taxes  and oil/gas industry revenues will have to provide the in-depth analysis. One quick observation:  The bill  appears to prohibit cities and counties from imposing any taxes on the oil and gas industry other than property taxes.

Miscellaneous. In a provision unrelated to oil and gas, the bill caps city and county property tax revenue at an 8% increase over revenue received the previous year.

The bill requires  a number of new studies, including a  feasibility study for  a liquified natural gas export terminal on the N.C. coast.

Delayed Discussion of Fracking Chemical Disclosure Rule

October 18, 2013.  According to  staff in the Department of Environment and Natural Resources,  the October 25, 2013 meeting of the Protection of Trade Secrets and Proprietary Information Study Group has been cancelled. The study group will next meet in November.

As mentioned in an earlier post,  the study group has been working to resolve the  controversy   over  a draft Mining and Energy Commission (MEC) rule on disclosure of chemicals used in hydraulic fracturing fluid.  Last spring, the  MEC’s Environmental Standards Committee approved a draft rule requiring  drilling operators to disclose all  chemicals used in hydraulic fracturing fluid  to DENR, but  limiting  the amount of information  provided to the public on  trade secret chemicals. The controversy arose  because  oil and gas industry representatives objected to routine disclosure of   trade secret  information  even to state regulators. The industry preferred alternative language  allowing  the drilling operator to  withhold specific information on trade secret chemicals  unless DENR needed the information to respond to a   threat to the environment or public health.

You can find more about  the controversy over the disclosure rule and existing state law on protection of  trade secret information here and here.

N.C. Fracking Disclosure Rule: Update

October 8, 2013. The state’s Mining and Energy Commission (MEC) has still not  moved  forward with a  rule requiring disclosure of chemicals used in hydraulic fracturing fluid, although the commission’s  Environmental Standards Committee approved a draft rule in the spring. The  draft rule  requires a drilling  company to  give  the Department of Environment and Natural Resources (DENR)  specific information identifying  all chemicals used  to hydraulically fracture a natural gas well. The draft rule also requires public disclosure of  fracking chemicals,  but allows information about any chemical legitimately designated as a trade secret to be kept confidential and identified to the public only by  chemical “family”.   (The draft rule allows more specific information to be  requested by  a health professional or  by emergency   response personnel  to diagnose and  treat a health condition  or  respond to  an emergency.)

A recap of the controversy around the draft rule. Following committee approval of the draft rule, the Mining and Energy Commission delayed consideration of the rule because of oil and gas industry opposition.  Industry representatives objected to  including trade secret chemicals in  the disclosure to DENR staff. The industry  preferred an earlier rule draft that allowed  drilling companies to withhold information on trade secret chemicals  from state regulators as well as the public unless DENR needed the information to respond to environmental damage or a specific health concern. See an earlier post for more on the MEC decision to delay consideration of the disclosure rule. The important thing to remember — the conflict over the draft rule has to do with providing complete information on hydraulic fracturing chemicals to state environmental regulators.  Every  draft of the chemical disclosure rule has allowed drilling companies to withhold  trade secret information from the public.

The oil and gas industry’s  objection to routine disclosure of trade secret chemicals to DENR staff comes in part out of concern about  the department’s ability to keep the information confidential. The  N.C.  Public Records Act  generally requires state agencies to provide agency records to any citizen on request;  information submitted to DENR by a drilling company would be considered a “public record” under the law.    The Public Records Act, however,  has  existing  provisions to protect the confidentiality of trade secrets and  other DENR programs have successfully used  those provisions  to withhold trade secret information  from the public.  You can find an earlier post about  the N.C. Public Records Act protection for trade secrets  here.

Legislative intervention.  During the legislative session, the N.C. Senate  moved  to resolve the chemical disclosure issue in favor of the oil and gas industry position. A Senate  committee  approved language allowing  drilling companies to withhold information on a trade secret chemical  used in hydraulic fracturing fluid from DENR  unless  the Secretary of Environment and Natural Resources requested the information to “respond to a situation that endangers public health or the environment”.  Senators  added the language to House Bill 94 (Amend Environmental Laws), which had already passed the House and was moving through the Senate.  In response to a backlash from both the public and the Mining and Energy Commission itself, the Senate amended the bill to allow DENR staff to review — but not receive — information on trade secret chemicals used in hydraulic fracturing. You can find earlier posts on the two different Senate proposals here and here.  In the end, House Bill 94  died and the General Assembly did not adopt any legislation on disclosure of hydraulic fracturing chemicals.

Back at the Mining and Energy Commission.  When the MEC delayed consideration of the draft chemical disclosure rule, the  commission created a new  Protection of Trade Secrets and Proprietary Information Study Group to look into the issues around disclosure of trade secret information to DENR.  Legislative activity overtook the study group’s work for awhile, but failure of the Senate legislation  puts the issue back in the hands of the MEC without any particular legislative direction.  The MEC will need to resolve on its own the tension between the oil and gas  industry’s desire to withhold trade secret information from environmental regulators and DENR’s need  for information that may be critical to understanding the environmental impacts of hydraulic fracturing. The next meeting of the study group has been scheduled for October 25, 2013 following the MEC meeting.

Mineral Rights May Include Authority to Build Waste Disposal Pits On Site

September 30, 2013.  The federal appeals court for the Fourth Circuit  issued a decision on September 4, 2013 concluding that West Virginia common law gives  the owner of mineral rights authority  to build pits for disposal of drilling waste without  permission from the  property owner.  The decision in  Whiteman v. Chesapeake Appalachia, L.L.C., 2013 U.S. App. LEXIS 18359, 43 ELR 20205, 2013 WL 4734969 (4th Cir. W. Va. 2013), may have implications  beyond West Virginia since the Fourth Circuit Court of Appeals also decides cases from North Carolina and other mid-Atlantic states.

The Facts. Chesapeake Appalachia,  L.L.C. owns the  mineral rights under 101 acres of farmland owned by the Whitemans.  Ownership of the property comes through two deeds.  When Mr. Ellis O. Miller  sold the  property that is now the Whiteman farm,  each deed  retained  “the oil and gas within and underlying the above-described parcels as well as all of the coal not heretofore conveyed, and all other minerals within and underlying the above described property, with the necessary rights and privileges appertaining thereto.”  The deeds did not mention retaining any uses of the surface property.  Chesapeake Appalachia  ultimately acquired the mineral rights  retained by  Mr. Miller.

Chesapeake has three natural gas wells on  10 acres of the Whiteman property.  When Chesapeake applied for  state drilling permits, the company  indicated that drilling waste (including drill water, flow back, and formation cuttings) would be disposed of by land application.  After drilling on the Whiteman property, Chesapeake   put  the drill cuttings into open pits located near the wellheads. At the end of the drilling process, Chesapeake removed the plastic liners from the waste pits, mixed the drilling waste with clean dirt and compacted and covered the pits.

The Whiteman Lawsuit.  The Whitemans sued  to force Chesapeake to remove the waste pits, arguing that Chesapeake’s  ownership of the mineral rights did not give the company authority to put waste disposal pits on the property.   Although the Whitemans admitted that the pits had not caused a significant financial hardship, the family  had  concerns about possible future liability associated with the waste.  The lawsuit originally included a number of  claims under West Virginia common law; the only claim that survived to reach the Fourth Circuit Court of Appeals  alleged that Chesapeake trespassed by building the waste pits without the Whitemans’ permission.

The Legal Issue.  Common law trespass means entering  another person’s property without lawful authority. Leaving a structure  (such as a waste pit) on the property without lawful authority would be considered a continuing trespass. Under West Virginia common law, the owner of mineral rights only enters the  property unlawfully if,  under a  “reasonable necessity” standard, the mineral  owner  goes beyond the mineral rights that have been granted and intrudes on the rights of the surface owner.  So the Fourth Circuit Court of Appeals described the legal issue  in the Whiteman case  as:  “whether Chesapeake’s permanent disposal of drill waste upon the Whitemans’ surface property is “reasonably necessary” for the extraction of minerals.” If creation of the waste disposal pits was reasonably necessary for extraction of the natural gas, Chesapeake did not need the  Whitemans’ permission.

The Decision. The Whitemans argued that building a waste pit  on site was not reasonably necessary to extract  natural   gas because Chesapeake had other waste disposal alternatives.  The  Fourth Circuit admits that Chesapeake could have used a  “closed loop” waste system and offsite disposal of the solid waste instead of open pit disposal. (A closed loop system keeps all liquid drilling waste in pipes or tanks to avoid contact with the ground.)   Although the technique was relatively new when the Whiteman wells were drilled in 2007 and 2009,  Chesapeake had begun using closed loop  systems  in Texas and Oklahoma as early as 2004-2005.  But the  Fourth Circuit  concluded that open pit waste disposal could still be “reasonably necessary” to extract natural gas on the Whiteman property for two reasons: 1.  open pit waste disposal  was  the most common waste disposal technique used in West Virginia at the time Chesapeake drilled the Whiteman wells;  and 2.  state environmental standards allowed use of open pit disposal.  (This part of the court’s analysis led to the kind of statement only a lawyer could love —  “reasonably necessary” does not mean “necessary”.) As a result, the court concluded that Chesapeake’s ownership of  the mineral rights gave the company  authority to dispose of drilling waste on the Whiteman property even though the original reservation of  mineral rights made no mention of that use of the surface property.

The Whiteman decision has to be troubling for surface owners.  Many  cases have  recognized that ownership of mineral rights includes authority to access the property to extract the minerals (by putting in roads, for example).  The Whiteman decision suggests that ownership of mineral rights also gives a drilling company authority  to use the surface property for any number of  auxiliary processes associated with oil and gas extraction. Such an expansive interpretation of mineral rights  virtually eliminates the surface owner’s power to negotiate with the drilling company over  surface impacts.

Another concern is that the  Fourth Circuit  decision relied on  common use of  open waste pits in West Virginia  and  consistency with state environmental standards  to  recognize a  right to  build waste pits  without the surface owner’s  permission. The court does not make a particularly strong case for allowing a drilling operator to impose a use on the surface owner simply because the practice is common and has not yet been prohibited by the state. Given the pressures on  environmental programs — particularly in states that rely on revenue from oil and gas–  state acquiescence  in a practice should not be sufficient  reason to force it on the  surface owner.

Implications for North Carolina. North Carolina common law on trespass  is very similar to West Virginia  law, but North Carolina has  few  court decisions on the scope of mineral rights. (With no oil, gas and coal mining to speak of, there have been  few controversies between surface owners and the owners of mineral estates.)  But in 2012, the North Carolina General Assembly  provided some additional protection to surface owners by statute. G.S. 113-423.1  requires an oil or gas operator  to accommodate the surface owner by minimizing intrusion  on  and damage to the surface.  That  means “selecting alternative locations for wells, roads, pipelines, or production facilities, or employing alternative means of operation that prevent, reduce, or mitigate the impacts of the oil and gas operations on the surface, where such alternatives are technologically sound, economically practicable, and reasonably available to the operator.”

But the  N.C. law goes on to say that it should not be interpreted  to “prevent an operator from entering upon and using that amount of the surface as is reasonable and necessary to explore for, develop, and produce oil and gas…” [Emphasis added].  We now know what the Fourth Circuit Court of Appeals believes “reasonably necessary” means in the context of a drilling operator’s construction of a waste disposal pit on a West Virginia drilling site. The question is  whether  the first half of the new North Carolina law  –requiring  minimization of  surface impacts — may lead to a different decision about what  will  be considered  “reasonable and necessary” here.

N.C. Senate Tries to Quiet Controversy over Disclosure of Fracking Chemicals

July 2, 2013: Earlier today, the Senate  took a first vote on  the Senate version of House Bill 94 (Amend Environmental Laws).  The Senate version already looked significantly different from the bill that came over from the House, but senators approved several more floor amendments before voting on the bill. One amendment attempts to calm a controversy over new language  on disclosure of fracking chemicals that senators added to House Bill 94 in committee.  The new language allowed drilling companies to withhold information on “trade secret” chemicals from state regulators; those chemicals would only be identified if  needed  to address an environmental emergency or health hazard. An earlier post talked about the disclosure language and some of the problems with after-the-fact disclosure of fracking chemicals.

The proposed limits on chemical disclosure were not well-received.  Members of the state’s  Mining and Energy Commission —  many appointed by legislative leaders — objected strenuously to the bill language. The commission had already drafted a disclosure rule that required drilling companies to fully disclose the chemicals used in hydraulic fracturing to staff in the Department of Environment and Natural Resources (DENR), but protected trade secret information from disclosure to the public. Because of objections from Halliburton lawyers, the Commission had delayed action on the draft rule to allow more time for DENR to  address concerns about trade secret protection.

The Senate bill language clearly caught members of the Mining and Energy Commission by surprise. Although DENR had signed off on the new legislative language, no one had consulted the MEC.  On behalf of the Mining and Energy Commission, Chair James Womack delivered a letter to legislators  expressing concern  about allowing an energy company to  unilaterally decide to withhold information from the state by labeling it a trade secret. The letter also noted that the bill would be inconsistent with the way trade secret information is normally handled under the state’s  Public Records Act.  Full text of the MEC letter here:  H94 Concerns_MEC Memo_30Jun2013 (1).

In an effort to quiet the controversy, the Senate amended the bill on the floor to revise the disclosure language again.  The amended language requires the Mining and Energy Commission to adopt a chemical disclosure rule that will do two things:

1.  The rule would allow  DENR and the MEC  to  “review” information on chemicals used in fracking fluid, but not  actually “take possession or ownership” of trade secret information. The amended language seems  intended to prevent creation of a public record that might become the focus of a lawsuit over disclosure. State regulators could see information on fracking chemicals,  but could not receive the information in writing and keep it on file with other information on the fracking operation. While that approach may make the industry more comfortable, it will make it very difficult for  DENR staff to have the information needed  to provide adequate oversight for drilling operations– a problem that would be compounded over time by staff turnover.  Allowing a DENR staff person to see the  list of  fracking chemicals  when fracking begins does not ensure the availability of that information to staff five years later.

It also isn’t clear whether the state would have any recourse if the information provided for review turned out to be inaccurate or misleading. Generally, state agencies can take enforcement action if a permit applicant submits inaccurate or misleading information; under the new Senate language, the information would be made available for review but never actually submitted to the agency.

2. The disclosure rule would also require public disclosure of the chemical family for each fracking chemical through an online chemical registry such as FracFOCUS. The draft MEC rule had similar language, except that the draft rule required disclosure of each specific fracking chemical unless the chemical constituted a trade secret.  Under the rule, disclosure of the chemical family in place of the specific chemical would only be allowed for chemicals designated as trade secrets.

The Senate has to take one more vote on the new version of House Bill 94. Once approved by the Senate, the bill goes back to the House for concurrence in the Senate’s changes.